China's unsustainable growth

Peter and Susan Calvert define developing countries as those that have a low quality of life compared to the rest of the world or those countries whose economic growth is unsustainable, despite a high standard of living (2007, p. 4).

China’s enormous GDP by itself does not make it a developed country; it simply means that China is an enormous country. The per capita gross national income calculated with purchasing power parity is a much better measure of the standard of living, because it takes into account the cost of living differences throughout the world. This measure shows China at $6,546 according to 2009 estimates, placing it below other developing countries such as Ecuador, El Salvador, Jamaica and Brazil (International Monetary Fund, 2009).

More importantly however, China’s economic growth is unsustainable, because of the way investment capital is distributed in China. “Who you know counts for much more than whether you have a good business plan. Between Asian systems of family and social ties and the communist system of political relationships, loans have been given out for a host of reasons, none of them having much to do with the merits of the business” (Friedman, 2009, p. 92). As a result, a huge proportion of those loans turns into bad debt, to the tune of 25-40% of total GDP. The weight of that debt will pull the Chinese economy apart as soon as growth starts to slow (Friedman, 2009, p. 95).

The artificially undervalued currency of China is also a problem. The undervalued yuan has made it much easier for China to export products at low prices and has made imports more expensive which reduces domestic competition with foreign companies. This accounts for a lot of China’s economic growth, but it has also made that growth unstable and kept the standard of living quite low for the Chinese people (Morrison & Labonte, 2009, p. 2).The Chinese government is reluctant to allow its exchange rate to be set by market forces because it fears it would cause economic instability that would turn into political unrest down the line (Morrison & Labonte, 2009, p. 4). China has also invested heavily in the U.S. treasury bonds that fund deficit spending. Any changes in currency policy that increase the worth of Chinese currency decrease the value of these investments, which are believed to total more than a trillion dollars (Morrison & Labonte, 2009, p. 12).

Therefore, China must continue to be considered a developing country, and its immediate political interests keep it from making the kind of structural change needed to establish a sustainable economic plan that would lead to long-term development. This situation is not likely to change in the near future.

References

Calvert, P. & Calvert, S. (2007). Politics and society in the developing world. Essex, England: Pearson Education Limited.

Friedman, G. (2009). The next one hundred years. New York: Anchor Books.

International Monetary Fund. (2009). Report for selected countries and subjects. World Economic Outlook Database. Retrieved from http://imf.org/external/pubs/ft/weo/2009/02/.

Morrison, W. & Labonte, M. (2009). China’s currency: a summary of the economic issues. Congressional Research Service. Retrieved from http://web.ebscohost.com.ezproxy2.apus.edu/ehost/pdf?vid=1&hid=3&sid=b13a00f1-abaa-4009-89b9-c96a2f218a6f%40sessionmgr14.